531 F.Supp.3d 673
S.D.N.Y.2021Background
- Eighteen MHPI project entities (Plaintiffs) sued lenders, servicers, insurers, and individuals (Defendants) alleging a long-running scheme to extract undisclosed profits in military housing financings (inflated credit spreads, secret pre-closing bond sales, “stealth” credit enhancement arrangements, unnecessary surety/DRA funding, and unnecessary OIDs).
- Ray (originator/financial advisor) and GMAC/Capmark (later Jefferies entities) are alleged to have posed as fiduciaries/financial advisors while setting above-market loan rates and selling bonds pre-closing for secret profits; Ambac (insurer) and its MD Marfatia allegedly cooperated to avoid competition and manipulate ratings.
- After earlier proceedings in the Northern District of California, the California court dismissed most defendants for lack of personal jurisdiction but nevertheless ruled on 12(b)(6) challenges to the SAC and transferred the case to SDNY.
- Defendants moved here for reconsideration, arguing the California court lacked personal jurisdiction to decide merits and that, under Second Circuit/New York law, various claims fail (fiduciary duty, RICO timeliness, PSLRA/RICO amendment, predicate acts, group pleading).
- This Court: (1) held the California court erred to the extent it adjudicated 12(b)(6) merits without personal jurisdiction over most defendants, but (2) found no prejudice warranting vacatur except that Ambac and Marfatia’s fiduciary-duty-based claims (and aiding/abetting) and RICO claims by Sill Housing LLC and Lackland Family Housing LLC against Ambac/Marfatia must be dismissed for failure to plead fiduciary relationship or predicate acts by Ambac as to those plaintiffs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May a transferor court decide merits where it lacks personal jurisdiction over most defendants? | Plaintiffs argued a transferee-style merits ruling was permissible where the court had jurisdiction over at least one defendant and to avoid duplicative rulings. | Defendants argued the California court was powerless to rule on merits without personal jurisdiction over them. | Court: Supreme Court precedent requires personal jurisdiction before merits adjudication; California court erred to the extent it ruled on merits without PJ over most defendants, though remedial relief limited to identified prejudices. |
| Were fiduciary-duty and related state claims adequately pled as to Ray, Ambac, Marfatia, Jefferies entities? | Plaintiffs pleaded Ray/GMAC held themselves out as financial advisors/fiduciaries across Projects; Jefferies may be vicariously liable; Ambac/Marfatia verbally promised to act in Projects’ best interests. | Defendants argued lenders/insurers are not fiduciaries absent express agreement or special circumstances; disclaimers bar fiduciary claims as to Jefferies Mortgage; Ambac lacked sufficient specific allegations. | Court: Fiduciary relationship pled as to Ray and Jefferies entities (sufficient special circumstances, vicarious liability alleged). Ambac/Marfatia: allegations too conclusory/limited (pre-stealth projects only) — fiduciary and aiding/abetting claims dismissed as to them. |
| Are Plaintiffs’ RICO claims time‑barred (four‑year RICO SOL / inquiry notice)? | Plaintiffs contended fraudulent concealment and lack of transparency (shadow ratings, hidden deals) prevented earlier discovery; discovery in state Debt Service Reserve Litigation revealed scheme within limitations. | Defendants argued plaintiffs had inquiry notice earlier (LaSalle’s observations, market transparency) and limitations should bar claims. | Court: Under Second Circuit accrual/inquiry rules, dismissal at pleading stage not warranted; allegations of concealment and reasonable reliance survive motion — RICO claims not time‑barred on face of SAC. |
| Does the PSLRA/RICO amendment bar RICO claims (predicate acts that are securities fraud)? | Plaintiffs removed earlier GIC allegations from the SAC and argued the remaining bond‑related allegations are not securities fraud actionable by the SEC or private parties. | Defendants argued plaintiffs cannot "sanitize" pleadings to avoid the RICO Amendment and that bond fraud could support SEC enforcement (triggering the bar). | Court: Plaintiffs may omit prior GIC allegations; court accepted California court’s conclusion that RICO Amendment did not plainly bar the remaining bond‑fraud‑based RICO claims because Defendants failed to show the SEC could have brought a comparable enforcement action on these facts. |
| Did Plaintiffs plead RICO predicate acts, relatedness, conspiracy, and avoid impermissible group‑pleading? | Plaintiffs alleged a pattern (multiple predicate mail/wire fraud acts), relatedness (same scheme, participants, victims, methods), conspiracy (Jefferies knew of scheme and continued it), and supplied particularized predicate‑act details. | Defendants argued the SAC fails to plead two predicate acts as to each defendant (esp. Ambac re: Fort Sill & Lackland II), lacks vertical relatedness under Second Circuit, and improperly lumps Jefferies entities. | Court: RICO enterprise, pattern, relatedness, and conspiracy sufficiently pled under Second Circuit standards in most respects. But Ambac (and Marfatia) did not commit two predicate acts as to Sill Housing LLC and Lackland Family Housing LLC (Ambac not involved in those Projects) — those plaintiffs’ RICO claims against Ambac/Marfatia dismissed. Group‑pleading challenge to Jefferies rejected given factual allocation and vicarious/successor allegations. |
Key Cases Cited
- Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (U.S. 1999) (personal jurisdiction is an essential element before adjudicating merits)
- Sinochem Int’l Co. v. Malaysia Int’l Shipping Corp., 549 U.S. 422 (U.S. 2007) (federal courts generally should determine jurisdictional issues before merits unless a non‑merits ground supports dismissal)
- ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490 (2d Cir. 2013) (Second Circuit has proceeded to merits in multi‑defendant cases where court had PJ over some defendants but practice is prudential)
- Chevron Corp. v. Naranjo, 667 F.3d 232 (2d Cir. 2012) (discussing merits-first approach in complex jurisdictional settings and dismissing on merits where appropriate)
- H.J., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (U.S. 1989) (definition of relatedness and pattern for RICO predicate acts)
- S.E.C. v. Zandford, 535 U.S. 813 (U.S. 2002) (§10(b) reaches deceptive sales of securities where scheme and sale coincide; distinguishing SEC investor‑protection enforcement from the bond‑pricing facts here)
- Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (U.S. 2014) (cases finding securities‑law coverage typically involve victims who held, bought, or sold securities)
- Cohen v. S.A.C. Trading Corp., 711 F.3d 353 (2d Cir. 2013) (Second Circuit’s discovery‑accrual rule for RICO statute of limitations)